Dubai Real Estate Predictions 2016

ME PoV Spring 2016 issue

Following two years of significant capital and rental growth across much of Dubai’s real estate market, 2015 marked a slowdown and a return to more stable market conditions.

Our outlook for the year ahead is that generally market fundamentals for Dubai will remain positive in 2016, supported by a dynamic and growing economy, world-class transport and infrastructure and a stable investment climate. However, despite these market fundamentals, we do expect certain headwinds in Dubai’s real estate market, largely influenced by external factors.

Economy overview

The Economist Intelligence Unit (EIU) forecasts real Gross Domestic Product (GDP) growth in the United Arab Emirates (UAE) to average 3.6 percent per annum between 2015 and 2019, a decline from the 4.6 percent growth experienced in 2014. This forecast is largely due to the significant fall in global oil prices, along with wider global economic factors, such as a slowing Chinese economy. It is likely that Dubai’s GDP growth will outperform the wider UAE in 2016, largely due to the fact that its economy is considerably less dependent on oil revenue compared to the other emirates. Nevertheless, lower oil revenue is likely to drive lower bank deposit levels and greater withdrawals to support funding gaps that are likely to result in tighter liquidity and an increased cost of borrowing.

Despite the UAE’s forecast budget balance of 0.2 percent of GDP in 20161, significant scaling back of key infrastructure projects should be eased by Federal reserves and the new Law No. 22 regarding Public Private Partnerships (PPP) passed in November 2015, which aims to boost private infrastructure investment and drive development.

Meanwhile, the recent lifting of sanctions on Iran presents potential opportunities for Dubai in 2016.

The release of capital locked in Iran is likely to prompt an influx of investment to safe haven markets from which Dubai may benefit, as well as the opportunity for Dubai to act as a gateway for businesses and investors considering Iran.

Dubai’s residential market predictions for 2016

Following a significant number of project launches during 2015, the focus in 2016 will be project delivery. Whilst published pipeline forecasts estimate that some 40,000 units will get delivered in 2016, consultations with key developers suggest that a more realistic number will be approximately 10,000 units.

2015 saw average residential sales prices across Dubai decline by approximately 10 percent, which can be attributed to a number of factors, including exceptional growth experienced during 2013 and 2014; the ongoing decline in global oil prices, which has negatively influenced sentiment and demand from the Middle East North Africa (MENA) region; and the relative strength of the U.S. Dollar (to which the UAE Dirham is pegged), against currencies from key international source markets such as India, the United Kingdom and Russia, making Dubai a comparatively more expensive market. Average residential prices will decrease further in 2016 reflecting a transition to a more mature market. Further, an increase in more affordable stock and discounting in emerging locations placing downward pressure on citywide average sales prices, will likely take place.

While there may be a softening in residential rental prices in some submarkets, it is not anticipated that this will be to the degree of recent declines in residential sales prices. Rental price decline, however, could be exacerbated further if speculative investors, who are unable to sell product at pre-determined levels, decide to release units for rent instead.

Dubai’s hospitality market predictions for 2016

Occupancy levels at around 70 to 75 percent are likely to represent the “new norm” in Dubai’s hospitality market in 2016, compared to 79 percent in 2014, largely due to new supply being delivered. This can potentially be viewed as a positive as it will make Dubai a more affordable destination. As operators compete for occupancy, Average Daily Rates (ADRs) will soften, further encouraging growth in tourism volumes required to support the investment in tourism infrastructure being developed over the coming years.

Serviced apartments are likely to be considered more in 2016, driven by key source market trends, growing visitor demand for longer stays and better value accommodation. Notably in 2014, Saudi Arabia was the largest hospitality source market with 1.51 million visitors to Dubai, whilst Iran and China experienced year-on-year growth of 42 percent and 24 percent respectively2. With plans to increase capacity at Al-Maktoum International airport (DWC) and Dubai International airport (DXB) to reach a combined capacity of approximately 97 million passengers in 20163, there will be opportunities to capitalize on hospitality demand from transit and destination visitor growth and by promoting extended stay-overs in the Emirate, provided appropriate infrastructure, policies and incentives are implemented.

Dubai’s office market predictions for 2016

With a number of quality office schemes in prime areas of undersupply due for completion by the end of 2015 and during 2016, rental growth will probably slow in some submarkets and the power of negotiation will shift from landlords to tenants. Free Zones will continue to perform well and maintain high occupancy in the most prime office buildings in Dubai, especially those located in proximity to key transport infrastructure (airports, ports and logistics) as these industries are projected to experience economic growth in Dubai in 2016.

Within the office sector, a trend towards more mixed-use developments and a greater allocation of space to amenities will be noticeable. This will enable schemes to differentiate against competing schemes and meet occupier demand for retail and other uses in proximity to the workplace, as well as a strategy for developers to diversify risk and generate a more robust cash flow.

Given the shortage of high-quality office space in Dubai, expanding companies will be more amenable to leasing additional space than is required at present in order to accommodate future expansion, with a view to subletting surplus space in the short term. Linked to this, there will be more opportunities for investors and property managers to utilize data analytics and real time information to optimize lease management, occupancy, revenue and costs across their portfolio and better match occupier requirements with availability for improved financial performance.

Dubai’s retail market predictions for 2016

Despite a strong start to the year with 56 million visitors to the Dubai Shopping Festival spending around AED145 billion, some retailers reported a fall in sales in 2015. There will likely be a further moderation in retail sales in 2016 against a strong Dollar and slowing demand from international source markets such as Russia, China and parts of Europe.

Retail rental growth will be relatively flat in 2016, with the exception of super prime malls, which will likely continue to experience strong demand as they benefit from both tourist and resident spending. During the first nine months of 2015, Emaar Malls Group reported 90 million visitors, equating to 11 percent growth year-to-date and a 2 percent increase in tenant sales, compared to 2014 (Q1 to Q3.)

Sector specific, Food and Beverage retail will go from strength to strength in 2016, driven by greater brand penetration and expansion. Good prospects are also envisaged for fashion retail following the completion of the initial phase of D3 Design District, which has attracted a number of high-profile brands and fashion houses to Dubai. These key investments should attract talent and business to Dubai’s fashion industry and contribute to trade.

The full Dubai Real Estate Predictions 2016 report can be downloaded from the Deloitte website.

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